Going to IMF will bring in money, but it may turn into a political hot potato.
Real is the possibility of defaulting on payments
The Saudis have not said anything yet
The IMF would resurrect the begging bowl nightmare
It could have been a scene out of a French film. At an international bank in Islamabad, a sharp-suited Arab diplomat with close cropped hair, sun glasses perched on his head, is in a tense exchange with the branch manager, a worried-looking 30-something Pakistani.
“So, inshallah I come tomorrow, and you will have 35,000 dollars ready for me, okay?”
“No, sir, I cannot make a commitment. There is a crisis in the country, dollars are not available, we are trying to get the Central Bank’s help, but I cannot promise you anything.”
“That is not my problem. I come tomorrow, inshallah, and you have the money, okay?” This time the diplomat’s voice had a steely edge to it.
“No sir, I cannot promise,” the manager said.
“Ok, how much can you give? 30,000? No? 25,000?”
“No, sir, please try to understand, this is not my problem with you or your problem with the bank, this is a problem in the entire country. We are trying our best. All the embassies are our customers. Their salary days are coming up. There are so many payments to be made, so we are trying our best to make some arrangements. Please be patient.”
The Arab diplomat finally left with a promise from the bank manager to let him know later in the day how much money he could withdraw from his account.
With the country’s foreign exchange reserves scraping the bottom of the barrel, the bank manager is not the only one sweating in the Pakistani October.
According to figures released by the central bank last Thursday, the reserves have fallen to $ 7.32 billion, of which the State Bank of Pakistan’s share is $4.036 billion, while the rest is held by private banks. That, according to the government, is enough only to pay for a month of imports, despite the recent fall in oil prices. So severe is the crisis and so real is the possibility of defaulting on payments that the it is certain to see the PPP government, cap in hand, to the International Monetary Fund, as the possibility of financial aid from other quarters has receded.
But officials are still saying that the IMF option — it will bring in the money with strings attached and may turn into a political hot potato — would be its last resort.
Pakistan’s economic crisis became apparent about six months ago, coinciding with the new government taking office. In part it was triggered by the global oil and food prices, in part by a flight of capital due to the volatile political and security climate. The government has squarely blamed the Musharraf regime’s economic policies for creating the conditions of this crisis by misspending the billions of dollars received in financial assistance and remittances. President Asif Ali Zardari recently accused the previous government of frittering away precious foreign exchange importing luxury consumer goods, while doing nothing to develop infrastructure.
The shortage, and consequent efforts by the State Bank of Pakistan, the country’s central bank, to mop up dollars in the market, has seen the Pakistani currency plummet from Rs. 61 to a dollar to its present levels of about Rs. 84. Currency speculators have added to the crisis by hoarding greenbacks. There is a run on the banks with creditors rushing to transfer their money abroad.
The Karachi Stock Exchange, whose soaring index was the pride and joy of the Musharraf regime, was the first to be affected by the crisis. As the government dealt with its terrorist threat and with a power crisis that set off violent protests in Lahore and Karachi, it also had to announce a Pak Rs. 50-billion rescue package for the KSE whose index has fallen by 30 per cent since March.
Initially, the PPP-led government put its faith in Pakistan’s traditional friends to bail it out of its economic problems. Since April, there has been an expectation that Saudi Arabia would grant a deferred oil payment facility worth $ 5 billion. But the Saudis have not said anything yet. Instead, there have been reports that the Saudi royals are sulking after the Pakistan government, which lays out game hunting privileges for Arab rulers, withdrew a hunting ground from the Saudi Interior Minister Prince Naif and allotted it to a Dubai dignitary.
There were expectations too from Mr. Zardari’s Chinese visit earlier this month, but again, Pakistan’s “all-weather friend” agreed to build two more nuclear reactors, invest in two big dams, and help to launch Pakistan’s first satellite, but there were no offers of hard cash.
Need for hard cash
Hard cash is what the government desperately needs. Shaukat Tareen, a former head of Habib Bank and recently appointed Adviser to the Prime Minister on Finance, sent out an SOS to the world last week that Pakistan is looking for 4.5 billion dollars within the next 15 to 30 days to help it tide over the immediate payments crisis. It may need as much as $15 billion over the next three years to inject stability and restore confidence in the system.
The country’s economic situation is now so bad that it has for the moment even overtaken the threat from terrorism as the main source of instability in Pakistan. Observers of course realise that the two challenges are linked, and that an economically unstable Pakistan will weaken the government’s capacity to take on the terrorist challenge.
This is also the government’s sales pitch as it seeks funds. “Pakistan has paid an economic price for its role in the war on terror. That economic cost has to be understood. Should Pakistan be asked to bear this cost all by itself. It cannot, and the world must play its role if it wants Pakistan to play its role,” Foreign Minister Shah Mahmood Qureshi said at a press conference recently.
Mr. Tareen, the government’s main troubleshooter, has said approaching the IMF would be the last resort. The government says it will first tap “Friends of Pakistan,” a group of countries banded together in a U.S. initiative. The group is meeting in the UAE in the first week of November. But Richard Boucher, the U.S. Assistant Secretary of State, poured cold water that these countries would step in to fill the resource gap. During a visit to Islamabad last week he said the idea is “not to throw cash on the table.”
The world is waiting to see if President Zardari’s visit to Saudi Arabia, also in the first week of November, will yield any results. But hopes are not high and the government has already begun informal negotiations with the IMF. Pakistan may soon make a formal request to the Fund, whose board of governors is expected to discuss a bail-out package of about $ 9.6 bn when it meets on November 7.
According to media reports, the IMF rescue could be accompanied by the condition of a 30 per cent slash in the defence budget (the government has denied this), a cut in its pension bill by more than half, and imposition of new taxes. The IMF would also want to oversee the preparation of next year’s budget. All of this could prove politically unpopular for the government. It would also resurrect the begging bowl nightmare for Pakistan that the Musharraf regime claimed it had vanquished.
6 months ago